Today’s release of the S&P/Case-Shiller (CSI) home price indices for March reported that the non-seasonally adjusted Composite-10 price index declined 0.62% since February while the Composite-20 index declined 0.77% over the same period falling to the lowest level seen since the Great Housing Collapse commenced in 2006 further indicating that housing is continuing slump into a double-dip.

The latest CSI data clearly indicates that the price trends are continuing to slump and, as I recently pointed out, the more timely and less distorted Radar Logic RPX data is continuing to capture notable price weakness nationwide.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as compared to each metros respective price peak set between 2005 and 2007.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as on a year-over-year basis.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as on a month-to-month basis.

Additionally, in order to add some historical context to the perspective, I updated my “then and now” CSI charts that compare our current circumstances to the data seen during 90s housing decline.

To create the following annual and normalized charts I simply aligned the CSI data from the last month of positive year-over-year gains for both the current decline and the 90s housing bust and plotted the data side-by-side (click for larger version).

The “peak” chart compares the percentage change, comparing monthly CSI values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.

Friday, May 27, 2011

Today, the National Association of Realtors (NAR) released their Pending Home Sales Report for April showing home sales declined dramatically with the seasonally adjusted national index slumping a whopping 11.6% since March and falling an exceptional 26.5% below the level seen in April 2010, the largest year-over-year decline seen in the wake of the housing collapse.

Meanwhile, the NARs chief economist Lawrence Yun sounds a more somber tone while, more or less, recounting a reality that can no longer be whitewashed or avoided... housing has double dipped.

"The pullback in contract signings is disappointing and implies a slower than expected market recovery in upcoming months, ... The economy hit a soft patch in April from sharply rising oil prices, widespread severe weather with the heaviest precipitation in 20 years, and a sudden rise in unemployment claims."

The following chart shows the seasonally adjusted national pending home sales index along with the percent change on a year-over-year basis as well as the percent change from the peak set in 2005 (click for larger version).

The latest results are indicating that the manufacturing expansion slowed significantly falling to a near contraction level of 1 from a level of 14 a month earlier while the employee index declined to 9 and the prices paid for raw materials declined to 54.

The most notable declines leading the weakness were seen in the volume and backlog of orders and volume of shipments and the production index.

On a year-over-year basis real GDP increased 2.31% while the quarter-to-quarter non-annualized percent change was 0.46%.

The latest report reveals an notable decline in non-residential fixed investment with non-residential structures declining at a rate of 16.8% from the fourth quarter 2010 while residential fixed investment also declined falling at a rate of 3.3% over the same period.

Note that the BEA has yet to take down their estimates for Q2 residential fixed investment which still sits at the lofty level of a supposed 25.7% quarter-to-quarter change... not likely.... look for that figure to be revised down in coming releases impacting the anemic "final" Q2 2010 results.

Government spending declined notably with the national defense component declining at a rate of 11.7% from the fourth quarter 2010 while in total government expenditures shaved 1.07% from overall GDP.

Since the middle of 2008 though, two federal government sponsored “extended” unemployment benefit programs (the “extended benefits” and “EUC 2008” from recent legislation) have been picking up claimants that have fallen off of the traditional unemployment benefits rolls.

Currently there are some 4.04 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 3.58 million people that are currently counted as receiving traditional continued unemployment benefits, there are 7.63 million people on state and federal unemployment rolls.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage increased 9 basis points to 4.69% since last week while the purchase application volume increased 1.5% and the refinance application volume increased 0.9% over the same period.

Rates now appear to be trending down having, more of less, declined continually for the last four months.

Given that we are nearing the end of the Feds QE2 intervention, it will be interesting to see how long rates trend in the next few months.

In any event, the purchase application volume remains near the lowest level seen in well over a decade while refinance activity continues to slow.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages since 2006 as well as the purchase, refinance and composite loan volumes (click for larger dynamic full-screen version).

Tuesday, May 24, 2011

Hudson City Bancorp (NYSE:HCBK) has become an icon of traditionally run, prime-only, safe and sound regional banks.

Some time ago I took exception with the PR that Hudson City was spinning as it’s CEO, Ronald Hermance, appeared on a multitude of business and non-business media (Mad Money, CNBC, Bloomberg, Barron’s… even NPR) speaking of the merits of his banks “old fashioned” sound traditional lending practices which included never making subprime loans or other toxic affordability products.

Of course, Hermance downplayed his banks non-performing loan ratio which as of Q1 2011 stands at a not-so-respectful 2.92% of total loans with $886.5 million in delinquent loans, preferring instead to project the picture of a safe bank with only high quality loans and growing deposits.

While Hermance was making the rounds of media outlets and dropping talking points his banks big mortgages were going bad at a progressively higher rates.

How could Hermance sell so many of his shares, especially in light of the sound practices and dramatic upside potential?... As Cramer put it, this story was "as Good as Gold"!

Well... in retrospect Hermance was smart to dump out of this train wreck as the bank's stock has been, more or less, in the dumper ever since.

Today, it seems clear that the housing decline did not skip Hudson City Bancorp and although it is true that they did not participate in subprime lending, the bank originated jumbo loans in a market (primarily the New York, New Jersey metro area) that was as overheated as any during the housing boom.

Big prime loans, even with low loan to values go bust in down economies and our current housing driven bust with significant declines to home prices makes matters worse.

I’ve been arguing for the better part of three years that although the traditional media and apparently general consensus has focused on subprime and other “toxic” mortgage products as the source for the credit tumult, the historic deterioration would by no means be limited to these “bleeding edge” products.

Before this massive housing collapse is complete, I expect to see new records set for prime defaults, be they prime-Jumbo ARM loans, prime-Jumbo fixed rate loans, prime-conforming ARM loans or prime-conforming fixed rate loans… we will see historic defaults across the entire spectrum of mortgage products.

These results, while again strengthening a bit off of February's horrendous level still clearly indicates that the nation's housing markets are firmly entrenched in a double-dip and come fully in-line with the other pitiful housing data-points I have outlined in past weeks.

The CFNAI is a weighted average of 85 indicators of national economic activity collected into four overall categories of “production and income”, “employment, unemployment and income”, “personal consumption and housing” and “sales, orders and inventories”.

The Chicago Fed regards a value of zero for the total index as indicating that the national economy is expanding at its historical trend rate while a negative value indicates below average growth.

A value at or below -0.70 for the three month moving average of the national activity index (CFNAI-MA3) indicates that the national economy has either just entered or continues in recession.

It’s important to note that at -0.12, the current three month average index value is indicating that contraction may be in the offing.

The BLS considers a mass layoff event to be a condition where there are at least fifty initial claims for unemployment insurance originating from a single employer over a period of five consecutive weeks.

Today's release of the Household Misery Index showed that the level of misery declined in March dropping 0.05% but still remained near the peak for this cycle and nearly the highest level seen in 30 years while on a year-over-year basis, misery declined for the fourth consecutive month dropping 0.18% since March 2010.

Back in the 1970s and 80s the “Misery Index” was popularized as a measure that accurately captured the misery and malaise of the time.

The original Misery Index was a bit too simplistic as it only captured the severity of the two main vexing issues of the time, unemployment and inflation.

Today, inflation, as measured by the annual rate of change of the CPI-U, is not a significant source of financial misery.

Of course, households on fixed income may dispute that fact and many have argued that CPI itself does not accurately capture “real” inflation as it has never accounted for the ridiculous increasing costs of housing and other essentials so for the sake of formulating a new misery index, inflation will factored out.

Another key to formulating a new misery index is to specifically target “household” misery as opposed to including data that might target the miserable state of affairs of the federal government or corporate misery.

The Household Misery Index captures the following trends and weights them equally:

1. The U-3 unemployment rate2. YOY percent change of the 10-Year moving average of total nonfarm payrolls3. YOY percent change of the 10-Year moving average of “real” personal income4. YOY percent change of the 10-year moving average of “real” S&P 500

The unemployment rate captures the misery associated to the threat and severity of a potential bout of unemployment while the annual change of the 10 year moving average of non-farm payrolls captures a more fundamental sense of the overall job market.

The annual change to the 10 year moving average of “real” (adjusted with CPI-U) personal income captures a household’s long term sense of income prospects.

The annual change to the 10 year moving average of “real” (adjusted with CPI-U) S&P 500 captures a household’s long term sense of typical investment prospects.

Unfortunately, all home price series are simply not long enough to include in the formulation but there may be alternative measures that can be included in the future.

This is a notable improvement for misery and if the past is to be taken to be even just a crude guide, the level of household misery should continue to steadily improve in the coming months.

Both indices are still indicating expansion though the size of the latest pullback clearly demands that closer attention be paid to these series in future releases.

The following chart shows the current and future activity indexes both with their corresponding 3-month moving averages. The red line marks the threshold between contraction and expansion for these diffusion indexes.

Single family home sales declined 0.5% from March falling 12.6% below the level seen last year while the median selling price declined a notable 5.4% below the level seen in April 2010.

Further, inventory of single family homes remains high climbing 11.4% from March but declining 2.6% below the level seen in April 2010 which, combined with the relatively slow pace of sales, resulted in a jump in the monthly supply to 9.0 months.

The following charts (click for full-screen dynamic version) shows national existing single family home sales, median home prices, inventory and months of supply since 2005.

Since the middle of 2008 though, two federal government sponsored “extended” unemployment benefit programs (the “extended benefits” and “EUC 2008” from recent legislation) have been picking up claimants that have fallen off of the traditional unemployment benefits rolls.

Currently there are some 4.10 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 3.73 million people that are currently counted as receiving traditional continued unemployment benefits, there are 7.84 million people on state and federal unemployment rolls.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage declined 7 basis points to 4.60% since last week while the purchase application volume declined 3.2% and the refinance application volume jumped 13.2% over the same period.

Rates now appear to be materially trending down having, more of less, declined continually for the last four months.

Given that we are nearing the end of the Feds QE2 intervention, it will be interesting to see how long rates trend in the next few months.

In any event, the purchase application volume remains near the lowest level seen in well over a decade while refinance activity continues to slow.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages since 2006 as well as the purchase, refinance and composite loan volumes (click for larger dynamic full-screen version).